Downgraded chip industry may signal tech transition

The worldwide chip market dropped from being labeled "stagnant" to "in a slump" this year, with one analyst firm downgrading its forecast to a level that puts the entire year in a decline.

IHS iSuppli announced Monday that it is downgrading its forecast for the global semiconductor market this year. The analyst firm now expects worldwide chip sales to decline 2.3% in 2012, from $310 billion in 2011 to $303 billion this year.

This isn't the first time this year that IHS has lowered its semiconductor market forecast.

However, the latest revision does show a steeper drop than previous updates. In August, iSuppli predicted 0.1% decline, then in September it changed its forecast to call for a 1.7% decline.

If the firm is correct, this would be the first annual decline for the global chip industry since 2009.

Zeus Kerravala, an analyst at ZK Research, said the report shows a shift in the tech industry.

"Tech is in transition away from hardware to more of a focus on software and virtual services," Kerravala said. "We're still buying apps, games, movies and music, but we need to refresh our hardware less often. Tech will be fine, as there will be investments in cloud, mobile applications and virtualization, but the hardware segment will be flat."

While Kerravala said software and services companies like Oracle and Amazon will do well, hardware companies like Hewlett-Packard and Dell will be affected by the transition, and it could be a bumpy ride.

With the semiconductor market playing a pivotal role in hardware from servers to laptops, tablets and smartphones, a drop in chip sales means widespread trouble in computer hardware industry.

"Five out of the six major application markets for semiconductors, including the key computer segment, are expected to contract in 2012, pulling down the overall performance of the chip market," said Dale Ford, a senior director at IHS. "An extremely weak global economy resulted in poor demand for electronics. As a result, the semiconductor industry slipped from stagnation in the first half of 2012 to a slump in the second half."

On the bright side, Ford said the fourth quarter could bring a mild recovery in year-over-year sales, setting the stage for a market rebound in 2013.

While the wireless market still is predicted to continue to grow, the data processing, consumer electronics, industrial, wired communications and automotive segments all are expected to decline this year, reported IHS.

The PC-dominated data processing market is expected to drop by 7.8% in 2012.

There was also bad news for the global PC market , which is predicted to shrink in 2012 for the first time in 11 years, with the blame laid on the economy and consumers' growing passion for tablets and smartphones.

"The surge in popularity of smartphones and media tablets is driving healthy growth in the overall wireless semiconductor market segment in 2012, with a projected 7.7% expansion," said Ford. "However, all of the other end markets for semiconductors will see revenues fall in 2012, negating all the positive effects of the wireless segment."

Kerravala said he's surprised the rest of the chip industry is so bad that the booming tablet and smartphone segments aren't able to carry the entire chip market.

"While tablet and smartphone sales will be robust, the boom is probably behind us," he said. "The majority of people who need [a smartphone] have one, so it's now about the refresh."

IHS is predicting that global chip sales will rebound in 2013 if there is worldwide economic growth.

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